Financial Development and Poverty Alleviation: Issues and Policy Implications for Developing and Transition Countries

The paper states that financial development promotes economic growth thereby contributing to poverty alleviation.

• Reviews current thinking on the relationship between financial development and poverty alleviation;
• Surveys literature on the key theoretical underpinnings regarding the linkages financial development, economic growth and poverty alleviation;
• Discusses different indicators of financial development and documents evidence of financial underdevelopment in low and middle income countries;
• Attempts to identify why financial markets remain largely underdeveloped in developing and transition countries;
• Presents policy instruments, which promote financial services.

The paper concludes that macroeconomic stability is crucial for efficient financial development and poverty reduction however macroeconomic policies alone have limited capacity to alleviate poverty.